INCOME TAXES

The Company's pre-tax income (loss) from continuing operations for domestic and foreign sources is as follows (in thousands):



	Year Ended December 31,
	2015		2014			2013
Domestic	$	1,675	$	(7,230	)	$	(950	)
Foreign	2,763		6,105			6,882
Total	$	4,438	$	(1,125	)	$	5,932

Significant components of income tax expense attributable to continuing operations are as follows (in thousands):



	Year Ended December 31,
	2015			2014			2013
Current:
State	$	9		$	47		$	(2	)
Foreign	1,851			740			1,929
Total current	1,860			787			1,927

Deferred:
Federal	155			(386		)	(410		)
Foreign	(187		)	832			20
Total deferred	(32		)	446			(390		)
Total income tax expense	$	1,828		$	1,233		$	1,537

The following is a reconciliation of income tax expense computed at the United States statutory rate to amounts shown in the Consolidated Statements of Operations:



	2015		2014		2013
Federal income taxes at statutory rate	35.0	%	35.0	%	35.0	%
Taxes on foreign income which differ from the U.S. statutory rate	(1.8	)	13.9		(2.1	)
Effect of change in the enacted rate	(2.6	)	—		3.1
Change in valuation allowance	(2.3	)	158.4		(63.4	)
U.S. taxation of international operations	6.2		(170.1	)	12.0
Change in estimated liabilities	1.8		26.8		0.1
Non-deductible items	4.8		(170.9	)	41.3
State and local income taxes	0.1		(2.7	)	(0.1	)
	41.2	%	(109.6	)%	25.9	%

Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands):



	December 31,
	2015			2014
Deferred tax assets:
Federal, state, and foreign net operating losses	$	18,713		$	21,301
Postretirement benefits	608			655
Deferred employee benefits	1,924			2,450
Accrued pension	15,738			14,861
Inventory valuation	3,067			3,445
Foreign tax credit carryforwards	7,847			5,030
Other	2,804			3,155
	50,701			50,897
Less valuation allowance	(43,663		)	(44,789		)
Total deferred tax assets	7,038			6,108

Deferred tax liabilities:
Tax over book depreciation	(3,662		)	(3,997		)
Inventory valuation	(2,006		)	(2,103		)
Intangible assets	(1,637		)	(1,672		)
Other	(391		)	(477		)
Total deferred tax liabilities	(7,696		)	(8,249		)
Net deferred tax liabilities	$	(658	)	$	(2,141	)

Current deferred tax assets of $2.1 million and $2.2 million for 2015 and 2014, respectively, are reported in "Other current assets" in the Consolidated Balance Sheets. Non-current deferred tax assets of $0.5 million for 2015 and 2014 are reported in "Other non-current assets" in the Consolidated Balance Sheets.

In 2015, the valuation allowance decreased by $1.1 million, of which $1.0 million was due to operational results and $0.1 million of valuation allowance was recorded in other comprehensive income (loss).

In 2014, the valuation allowance decreased by $4.5 million. The valuation allowance decreased by $10.1 million due to operational results and a decrease in state tax credits in the U.S. In New York State, corporate tax reform enacted in March 2014 changed the tax rate of a qualified manufacturing company such as Hardinge to 0%. As a result, Hardinge determined that it was unlikely to recognize any of the $6.9 million of New York State Investment Credit carryovers, and therefore wrote off the deferred tax asset for the carryovers. A corresponding decrease in the valuation allowance of $6.9 million was recorded, since the deferred tax asset on the carryover had a valuation allowance against it. This decrease was offset by $5.6 million of valuation allowance recorded in other comprehensive income (loss).

At December 31, 2015, there were U.S. federal and state net operating loss carryforwards of $26.3 million and $35.1 million, respectively, which expire from 2028 through 2031. If certain substantial changes in the Company's ownership occur, there would be an annual limitation on the amount of the carryforwards that can be utilized. The U.S. net operating loss includes approximately $2.2 million of the net operating loss carryforwards for which a benefit will be recorded in "Additional paid-in capital" in the Consolidated Balance Sheets when realized. There are Foreign Tax Credit Carryforwards of $7.8 million which expire between 2020 and 2025. There also are foreign net operating loss carryforwards of $40.3 million, of which $2.7 million will expire between 2018 through 2034, and of which $37.6 million have no expiration date.

At the end of 2015, the undistributed earnings of the Company's foreign subsidiaries, which amounted to approximately $68.4 million, are considered to be indefinitely reinvested and, accordingly, no provision for taxes has been provided thereon. Given the complexities of the foreign tax credit calculations, it is not practicable to compute the tax liability that would be due upon distribution of those earnings in the form of dividends or liquidation or sale of the foreign subsidiaries.

A reconciliation of the beginning and ending amount of uncertain tax positions is as follows (in thousands):



	December 31,
	2015			2014			2013
Balance at beginning of year	$	2,342		$	2,743		$	2,514
Additions for acquired subsidiaries	—			—			267
Additions for tax positions related to the current year	282			182			—
Additions for tax positions of prior years	263			430			150
Reductions for tax positions of prior years	—			(393		)	—
Reductions for tax positions related to the current year	—			—			(57		)
Reductions due to lapse of applicable statutes of limitation	(582		)	(620		)	(131		)
Balance at end of year	$	2,305		$	2,342		$	2,743

If recognized, essentially all of the uncertain tax positions and related interest at December 31, 2015 would be recorded as a benefit to income tax expense on the Consolidated Statements of Operations. It is reasonably possible that certain of the uncertain tax positions pertaining to the foreign operations may change within the next 12 months due to audit settlements and statute of limitations expirations. The estimated change in uncertain tax positions for these items is estimated to be up to $1.5 million.

Interest and penalties related to uncertain tax positions are recorded as income tax expense in the Consolidated Statements of Operations. Accrued interest related to the uncertain tax positions was $0.1 million and $0.4 million at December 31, 2015 and 2014, respectively. Accrued penalties related to uncertain tax positions were $0.0 million and $0.1 million at 2015 and 2014, respectively. The accrued interest and penalties are reported in other liabilities on the Consolidated Balance Sheets.

The tax years 2012, 2013, 2014, and 2015 remain open to examination by the U.S. federal taxing authorities. The tax years 2010 through 2015 remain open to examination by the U.S. state taxing authorities. For other major jurisdictions (Switzerland, U.K., Taiwan, India, Germany, Netherlands and China); the tax years between 2008 and 2015 generally remain open to routine examination by foreign taxing authorities, depending on the jurisdiction.

Net taxes paid in 2015, 2014 and 2013 totaled $1.5 million, $1.9 million and $5.2 million, respectively.